Relationships Between Corporate Social Responsibility Materiality, Corporate Financial Performance, Analyst Forecasts, and Short-Termism
This dissertation is comprised of two essays. Financial analysts' role is to gather public and private information about firms' future financial performance and then relay this information to investors in the form of earnings forecasts. Recent research suggests that one signal of firms' future earnings changes is engagement in corporate social responsibility ("CSR") (Lys, Naughton, and Wang, 2015). The findings of Khan, Serafeim, and Yoon (2016) provide support for the conclusions of Lys et al. (2015) but also indicate that they only hold for firms that engage in "material" CSR, i.e., CSR that is financially important to long-term sustainability as defined by the US Sustainability Accounting Standards Board (SASB) in 2018). Khan et al. (2016), find no relationship between firms' "immaterial" CSR activities, i.e., CSR that is not financially important to long-term sustainability, and future earnings. The analyses in this essay test the efficacy of financial analysts' communication of apparent earnings signals embedded in material CSR by examining the relationship between the materiality of firms' CSR activities and characteristics of analysts' earnings forecasts, specifically, dispersion, magnitude of error, overall uncertainty, and common uncertainty. I hypothesize that if analysts are incorporating CSR earnings signals into their analyses, the quality of earnings forecasts will be positively affected, i.e., less dispersion, error, and uncertainty. Using 10,703 observations for 2,539 US companies from 2010-2015, results suggest that material CSR activities, both "strengths" (i.e., socially beneficial behaviors) and "concerns" (i.e., socially harmful behaviors), are associated with decreases in analysts' forecast errors, but not dispersion. I also find that material CSR strengths are associated with reduced levels of uncertainty and that immaterial CSR activities do not have any relationship with forecast characteristics. Overall, the results provide evidence that there are some analysts who are, and some who are not, sensitive the materiality of earnings signals embedded in CSR and are effectively communicating these signals to investors through their earnings forecasts.
The second essay of this dissertation is motivated by the results from Essay 1 and the findings of Khan, Serafeim, and Yoon (2016) that appear to indicate that immaterial CSR activities are not financially beneficial to companies. This then begs the question: Why would a company invest resources into immaterial CSR activities if they provide no corporate financial benefit? My primary hypothesis is that since material CSR activities are purposefully included in the newly published SASB CSR disclosure standards because of their importance to long-term financial growth and sustainability, perhaps immaterial CSR issues are specifically excluded because of their positive association with short-term corporate strategies. Unfortunately, the results of my analysis do not support this hypothesis. Instead, they suggest that firms with a short corporate temporal focus (CTF) actually tend to avoid engagement in both material and immaterial CSR activities. However, results of subsequent tests suggest that when firms combine a short-term CTF with immaterial CSR activities, they report increases in corporate financial performance (CFP), i.e., earnings and cash flow, in the following year. This finding contributes to the emerging body of literature in this area by suggesting that "immaterial" CSR may not actually be immaterial after all, but more research is necessary in order to determine exactly why this may be so.